Storms That Shatter Lives Hold Lessons for Insurers

It used to be the low-frequency, high-severity events that kept U.S. property insurance producers, carriers, and reinsurers up at night. These big Cats have become part of our collective history – Hurricanes Andrew, Katrina, Ike, Wilma, the Loma Prieta and Northridge earthquakes. Tragically, these massive natural events still come along every few years and devastate cities or entire regions.

We cannot stop Mother Nature from doing her worst, but sometimes mega-disasters help strengthen us for the future. In fact, one positive outcome of low-frequency, high-severity Cats is the distinct learning that comes in their aftermath. Researchers conduct real world, post-disaster studies of homes and commercial buildings to evaluate how they responded to various levels of natural force and stresses. In some cases, residents and policymakers in affected jurisdictions have taken significant steps toward mitigating future loss from mega-Cats by enacting better building codes (as Florida did after Andrew, Louisiana did after Katrina, and California did after Northridge). Other positive outcomes include creation of government-sponsored retrofit grant programs that provide much-needed funds for homeowners and business owners to improve and strengthen their structures.

In the past few years, without a significant land-falling hurricane or major earthquake, there still have been lots of sleepless nights for insurance industry executives. The reason? High-frequency types of weather events are causing more damage than ever before. In 2010, several strong inland storms produced hurricane-force winds and large hailstorms in unusual places. Tornadoes occurred at rare times and in atypical places, such as Orange County, Calif. (January), Brooklyn/Queens, N.Y. (September), Illinois and Wisconsin (November), and Oregon (December). Also during 2010, the largest hailstone on record was found in South Dakota (8 inches in diameter, weighing in at nearly two pounds.). According to Munich Re’s “Natural Catastrophe Year in Review,” for the third year in a row, thunderstorms caused more than $9 billion in insured losses in the United States, and multiple severe winter storms caused $2.6 billion in insured losses.

Unfortunately, 2011 is shattering more lives, property and loss records as higher frequency types of storms continue to be very severe as well. Wildfires burned from border to border in Texas and in other states in an unusually early 2011 rampage, destroying dozens of homes. On April 27, 2011, the largest one-day outbreak of tornadoes in U.S. history occurred. Sadly, these storms were killers. More than 350 people died in these storms – the second highest loss of lives on record from a single outbreak.

The question now is whether the essential lessons regarding loss reduction that we have learned from the infamous named Cats will arise from these recent, serial disasters. The lessons need to be learned and mitigation solutions applied so that everyone, including residents and insurers in the affected areas, can look forward to more robust communities. Public policy improvements to get people to protect themselves and increase the chances of community recovery are essential. Proven examples include better building codes, more rigorous and universal enforcement of codes, incentives for retrofitting or building to code or code-plus standards, and community-based initiatives. These steps also make good economic sense. According to the Multi-Hazard Mitigation Council, every dollar invested in natural hazard loss mitigation returns $4 to society; this is a tremendous cost/benefit ratio, particularly in an era of tight budgets at every level of the economy.

In addition, now is the time to create a true chain of value around better-designed and built properties. Community leaders, financial institutions, and the business community all have a deep interest in making sure that homes are not essentially disposable and residents are not in town only until a catastrophe strikes. Additionally, the private insurance markets in hazard-exposed areas will be healthier and more competitive if we can reduce losses and make communities more resilient.

If we have learned one lesson over the past few years, it is that California earthquakes and Gulf Coast hurricanes still loom, but the geographic spread of natural hazards that cause catastrophic, record level losses has never been broader, due to weather and demographic trends. Insurers must heed these winds of change and be at the forefront of efforts at the federal, state, and local levels to apply the lessons from Cats of every magnitude to prevent loss of life and property throughout our nation.

About Julie Rochman

Rochman is president and CEO of the Insurance Institute for Business & Home Safety. Web site: DisasterSafety.org.